South Carolina Life Insurance Practice Exam

What typically happens to the premium of a decreasing term policy over time?

1. It remains constant throughout the policy's life

2. It pays out a larger benefit as time goes on

3. Its premium steadily decreases over time, in response to its growing cash value

4. It increases to match inflation rates

The correct answer is: Its premium steadily decreases over time, in response to its growing cash value

In a decreasing term policy, the coverage amount, or death benefit, reduces over the life of the policy, typically in a structured fashion—such as annually or at specific intervals. However, it's important to note that the premium for a decreasing term policy remains constant and does not decrease in conjunction with the death benefit. The premium is based on the initial amount of coverage, mortality rates, and other factors when the policy is issued. As time progresses and the death benefit decreases, the policyholder continues to pay the same premium. Thus, while the benefit amount declines, the premium stays the same over the duration of the policy. This structure makes the decreasing term policy more affordable compared to whole life insurance, but the expectation that the premium would decrease over time due to cash value accumulation is inaccurate, as decreasing term policies do not typically build cash value. In summary, the characteristic of a decreasing term policy is that it offers a decreasing death benefit with a stable premium, thus allowing some misconceptions about premium trends. The misunderstanding about cash value or inflation effects does not apply here, as the policy is designed for simplicity and cost-efficiency rather than investment growth.